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Administration Outlines Credit Ratings Overhaul

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Continuing its push toward financial services reform, the Obama Administration delivered to Congress July 21 proposed legislation that would increase transparency, tighten oversight, and reduce reliance on credit rating agencies. The legislation is also designed to reduce conflicts of interest at credit rating agencies while also strengthening the Securities and Exchange Commission’s (SEC) authority and supervision of ratings agencies.

The Administration noted in a release announcing the proposed legislation that it fully supports the recent moves the SEC has made regarding credit ratings agencies. In February the SEC adopted several measures to increase the transparency of the rating agencies’ methodologies, strengthen disclosure of ratings performance, prohibit certain practices that create conflicts of interest, and enhance recordkeeping and reporting obligations to assist the SEC in performing its regulatory and oversight functions. The SEC has allocated resources to establish a branch of examiners dedicated specifically to conducting examination oversight of rating agencies. The SEC has proposed to require NRSROs to disclose, on a delayed basis, ratings history information for 100% of all issuer-paid credit ratings. The SEC has also proposed that each ratings agency should document its policies and procedures for the determination of ratings.

The Administration’s proposal would also establish a dedicated office within the SEC to strengthen supervision of ratings agencies and carry out regulatory actions. All credit ratings agencies would also have to register with the SEC under the Obama proposal.

To reduce reliance on credit ratings agencies, the Administration proposes that Treasury work with the SEC and the President’s Working Group on Financial Markets to determine where references to ratings can be removed from regulations. Treasury would also work with the SEC to examine opportunities to reduce reliance and increase the resilience of money market mutual funds. The legislation would also require the GAO to study and issue a report on the reliance on ratings in federal and state regulations.

The Obama plan would also require disclosure of preliminary ratings to reduce “ratings shopping” and require different symbols to be used to distinguish the risks of structured products.

As for conflicts of interest, credit ratings agencies would be barred from consulting with a company that they also rate, and would be required to designate a compliance officer who would be required to submit an annual report to the SEC.


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